Minimum Wage
The Minimum Wage
There is no more emotionally-charged topic in economics than the minimum wage. The reason people feel so strongly about the minimum wage laws is that it touches on class welfare, and as a result, class warfare. We’re used to seeing diametrically opposed arguments collide here at Ambidextrous Economics. What does economics tell us about the minimum wage, and how can we reconcile two very disparate views toward the minimum wage?
The argument from the right side of the aisle is that minimum wage laws create an inefficient price floor that ultimately leaves employers at a cost disadvantage when it comes to competition. Usually employers that pay minimum wage are retail establishments with already taxed margins, suggesting that there is very little room for appreciating wages without raising prices to customers & ultimately affecting the retail establishment from competing.
This may be true at the micro level, when considering any particular store, but on the whole the argument against competition is lacking considering that each store on the aggregate (i.e. the macro level) would face the same cost structure changes. Most fast food eateries and high volume, low-end tailored retailers such as Wal-Mart employ workers at comparable income levels as their customers. There is a good case to be made for the fact that these retailers customer base is largely composed of their own workers. There is little question that the so-called ‘working poor’ spend less when they make less. In much the same sense, one can count on the fact that lower income brackets spending increases in sync with wage increases as the percentage of saving among lower income earning households is consistently lower than higher income brackets.
In short, the argument that retail costs would be unduly taxed by raising the minimum wage is based on the assumption of scarcity. This is one of the principal assumptions of classical economics. Namely, we live in a world of scarcity with people that have infinite wants, and as a result we must make choices about what to consume and which goods and services to forgo.
The argument that the left counters with is that retail employers have plenty of money to spare, and to prove their point, proponents of raising the minimum wage will often cite the compensation packages of top executives. This argument is flawed only to the extent that you believe that the top pay of executive packages provide an incentive for lower workers on the totem pole to improve their performance to reach out and achieve the positions of higher compensation. Realistically, the types of executive positions that command million dollar salaries and stock benefits are beyond the reach of the everyday worker, and this imbalance is precisely what gives impetus to the status quo.
The status quo is such that retail workers are often unorganized price takers, and the minimum wage laws at the state and national level are one of the few checks in place looking out for the working class’ welfare.There stands little chance that wages at the lowest rung of the food chain will change without policy change at the government level. Because most income for these low-wage workers is usually spent as soon as it is made, i.e. living 'paycheck to paycheck', raising the minimum wage would theoretically put more money back into the economy, potentially making everyone, including small businesses and corporations, better off.
Historically, raising the minimum wage has benefited the working class, and any kind of improvement to the working middle class has ultimately led to a stronger economy as a whole. However, recent history is lacking contemporary evidence that this is the case because it has been so long since the minimum wage has been increased.
There is a special case within the minimum wage law debate in the form of unpaid internships. Typically these internships are for white collar jobs at the corporate level. Some believe that unpaid internships take advantage of interns in much the same way that indentured servants of earlier times were bound to pay a debt to their employer. It is often argued that the experience that an intern gains is part of the compensation package. However, this view proves that the system favors interns that come from higher status families, as these would be the only ones who could afford to work for free. The larger question is why large corporate entities with plenty of cashflows would need to exploit free labor. Regardless, changing the minimum wage laws to include unpaid internships, such as those for college credit, would lead to fewer internship opportunities. After all, how can one easily compete with or replace free labor?
Ultimately, minimum wage laws provide protection for working class households, who have necessarily borne the brunt of the economic collapse more than their white-collar opposites. But these lower income brackets are also the least likely to set aside savings, and are thus most inclined to spend their income at the same fast food and big box retailers that employ them. The increase in wages would likely translate to higher spending at these same businesses, suggesting that the cost to retailers in the form of higher wages would likely be offset with higher sales revenues. These revenues would be a combination of increased spending and higher price points created by the rising cost structure for businesses.
Where an individual stands on the divisive issue of the minimum wage laws is likely determined by education level and political orientation toward unionized workforces. Those that do not have to deal with working minimum wages are the least likely to support a raise in the minimum wage, purely as a matter of self-interest. Those that deal everyday with hourly wages that allow them to just barely subsist above the poverty line or, more likely, below the poverty line despite their working status are likely to favor raising the minimum wage.
While we can debate the merits of creating an artificial floor for wages from a purely economic position, the socioeconomic argument weighs heavier on the shoulders of the Ambidextrous Economist. The difference is between a purely theoretical viewpoint of market failures created by a price floor and the real-life problem of subsistence for lower income working families. Behavioral economics suggests that, absent realistic incentives far from the higher-income wages of top executives, a lack of mobility, ability to organize for better wages, benefits and protections will lead to a disillusioned workforce. This disillusionment ultimately leads to higher churn of workforce, higher training costs and poor customer service. The detriment of these last facets, perhaps the least visible to business owners, leave everyone worse off.
Pareto efficiency is the idea that there is an optimal level of consumption where one person cannot be made better off without making someone else worse off. This is a purely theoretic argument as proponents of behavioral economics would be quick to point out, one where Pareto efficiency does not exist. In situations where zero-sum negotiations take place, you cannot expect to make one person better off without creating the detriment of another party. If we accept the idea that we live in a world of scarcity, Pareto efficiency cannot exist. The only hope for reconciliation is the belief that there are situations where the state of nature is one of abundance.
The only way that we can reconcile the back and forth argument is by dropping the zero-sum and scarcity assumptions, believing there is a collaborative approach that can make both parties better off. This “expand the pie” framework is difficult to achieve because it involves a leap of faith from both sides of the argument — something both parties are quick to preach of but slow to practice out of the fear for self-preservation. Indeed, once self-preservation becomes the issue at hand, we’ve touched upon the real conundrum of the minimum wage argument.
AE - 9.15.2013
The Ambidextrous Economist will work for food. He can be reached at AmbidextrousEconomist@gmail.com.